Patel v Mirza [2016] UKSC 42

The Supreme Court has handed down judgment in Patel v Mirza [2016] UKSC 42. The lead judgment was by Lord Toulson JSC.

Patel v Mirza in the Court of Appeal

In the Court of Appeal judgments in Chandrakant Patel v Salman Mirza [2016] UKSC 42 (on appeal from [2014] EWCA Civ 1047), Gloster LJ disagreed with the majority holding that it did not matter whether an illegal agreement was stated in the pleadings. What was key was to examine the policy considerations in play. Gloster LJ held that the policy underlying the criminal law that applied to insider trading namely s.52 of the Criminal Justice Act 1993 (“the Act”) was not engaged nor did it require an investor to lose all his rights when no inside information was received and no insider dealing took place.

In the Supreme Court

Nine Supreme Court Justices sat to resolve the schism as to the basis for the illegality defence that emerged in previous Supreme Court judgments – Hounga v Allen [2014] 1 WLR 2889, Bilta (UK) Ltd v Nazir (No 2) [2016] AC 1 and Les Laboratoires Servier v Apotex Inc [2012] EWCA Civ 593

The majority led by Lord Toulson (with whom SCJs Hale Kerr Wilson and Hodge agreed, and with whom Lord Neuberger substantially agreed) endorsed the approach adopted by Gloster LJ in the Court of Appeal but went further by overruling the reliance test adopted by the House of Lords in Tinsley v Milligan.

• The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system.
• In assessing whether the public interest would be harmed in that way, it is necessary a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, b) to consider any other relevant public policy on which the denial of the claim may have an impact and c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.
• Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way.
• The public interest is best served by a principled and transparent assessment of the considerations identified, rather by than the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.
• A claimant, such as Mr Patel, who satisfies the ordinary requirements of a claim for unjust enrichment, should not be debarred from enforcing his claim by reason only of the fact that the money which he seeks to recover was paid for an unlawful purpose.
• There may be rare cases where for some particular reason the enforcement of such a claim might be regarded as undermining the integrity of the justice system.
• The foregoing rendered the locus poenitentiae exception no longer necessary.

The minority SCs Clarke, Mance and Sumption agreed with the result that the Claimant was entitled to recover but differed from the reasoning of the majority preferring a rule based approach on the basis that not to do so was productive of uncertainty and that it was contrary to established authority (such rule being that that restitution would normally be available although there would be exceptions).

Philip Shepherd QC of XXIV Old Buildings assisted by Professor Graham Virgo, instructed by K.A. Arnold & Co, acted for the successful Respondent/Claimant against Matthew Collings QC, instructed by Mishcon de Reya, for the Appellant.